easy · Private Equity
Why is the Internal Rate of Return (IRR) considered an unreliable performance indicator during the first 3 to 5 years of a private capital fund's life?
- Public market benchmarks are always quoted gross of fees, unlike net PE IRRs.
- The GP simply has not yet earned enough carried interest to normalize the return.
- Early negative cash flows from fees and investment costs create a J-curve effect
- In fact, multiples like MOIC are far more sensitive to cash-flow timing than IRR is here.
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